It is not too late for a Tory tax revolution

The 'unfunded’ tax cut of today is the economic stimulus of tomorrow.

Which of the following statements is true? 1. George Osborne’s number one priority is to rescue the British economy. 2. George Osborne’s number one priority is to win the next election for the Conservatives.

The answer, of course, is both: they are joint first priorities. And had Mr Osborne and his Prime Minister not tied themselves up in a self-defeating obsession with image-making, there would be no logical problem with this at all. The two aims would be neatly complementary. Instead, it is now the received wisdom that these two things are mutually contradictory – that one will have to give way to the other – and that we will find out whether economic reality or political expediency got the upper hand when the Chancellor stands up in the Commons on March 21. So Mr Osborne has managed to get himself into a very bad place: instead of his next Budget simply raising the usual questions about his (as with any Chancellor’s) fiscal management, it has become a test of his character as well.

And all because the present Tory leadership was not prepared to make a case for the value of wealth creation and the destructive effect of high taxation on general prosperity. As it is, Mr Osborne has to “choose” between being seen as a cowardly populist who dare not abolish the 50p rate of tax even though he knows that it is damaging to economic recovery, or risk being labelled a “friend of the rich” which is, as legend would have it, fatal to the new Tory brand. In fact, we know which one he has chosen. He will not dispense with this absurdly counter-productive tax and this decision will have at least as much to do with the rhetorical pit which the Conservatives have dug for themselves as it does with pressure from the Liberal Democrats.

There was no need for this fateful fork-in-the-road dilemma. But the Tories clung to their neo-Left message – promising to match Labour’s public spending levels and to “share the proceeds of growth” (which is to say, re-distribute the wealth created by enterprise, which was Gordon Brown’s central idea) – until the last devastating moment when the system collapsed and left us with no money to spend and no growth to share the proceeds of.

So they were utterly disoriented by the new circumstances, having discarded what would have been their much more useful and appropriate traditional preferences for low taxation, low spending and small government. As more than one senior Tory has admitted to me, they found themselves, after that wilful disinheritance, with nothing to say. Politicians who know full well that tax cuts are essential for growth, and that the basic principle of a free-market economy is the accumulation of capital for investment and business expansion, must now eschew abolishing a tax which actively penalises the accumulation of capital and the expansion of business.

Just imagine what their message might be now, had they not sold the pass. How they could cut a swath through the economic illiteracy which insists that tax policy be used as a form of social censure rather than a positive way to create employment and opportunity. Instead of having to accept, with bad grace, the perfectly justifiable Lib Dem measure of raising the personal tax allowance, they could argue robustly that this should be merely one part of a general restructuring of all the tax bands.

The threshold for higher rate tax has been allowed, through fiscal drag, to remain at a ridiculously low level. People who earn just over £43,000 per year should not be paying what used to be called “super tax”. Realistically, the starting point for the higher rate should now be around £60,000. Not only would this be (the magic word) fairer but it would provide a tidal wave of economic stimulus. These are the taxpayers, after all, who could spend their disposable income on new cars, electronic equipment and “big ticket” white goods.

The poor are certainly deserving of a tax cut – especially as we are trying our best to persuade people off welfare and into work. But, sadly, this boost to their income is likely to go on necessities such as food and heating. If you want to give the manufacturing sector a jump start, then you must include the hard-pressed slightly higher earners in your tax reliefs.

The whole scale should, in reality, be ratcheted up: all the bands, including the wretched 50p one if it must survive, should begin at higher thresholds to free up significant demand in the economy and encourage confidence in future prosperity. Ah, you say, but this would be hugely expensive. Mr Osborne rules out “unfunded” tax cuts, so other taxes would have to be invented to make up for the loss. Which brings us to the Lib Dems’ favourite milch cow: wealth taxes.

What a political no-brainer it sounds: let’s tax “existing wealth” – which doesn’t sound like you are attacking working people or even the businesses that are actively creating wealth, but just mountains of money that are sitting there doing nothing. The trouble is that there is no clear distinction between “wealth creation” (hooray!) and “existing wealth” (boo!). Indeed, the former tends to result in the latter. And if there is a heavy penalty on “existing wealth”, why should anyone take the risks that are usually involved in creating it?

Where is the incentive to build and expand a business if you are to be clobbered as soon as your profits reach a point where they could conceivably be regarded as “existing wealth” – which is, when you think of it, an odd phrase. “Existing” as opposed to what? Non-existing? Transitory? Imaginary? What it suggests is something static and unproductive which an expensive property or “mansion” might seem to be – unless it happens to be the home you’ve lived in blamelessly for 40 years while its value inflated.

But wealth in any form is almost never static. Unless it is literally kept under the mattress, it is invested in banks or pension funds and thus becomes productive. Even the money tied up in property is eventually inherited and circulated. That is the logic of a dynamic free-market economy.

Today’s “unfunded” tax cut is tomorrow’s genuine economic stimulus – and the growth which results from that stimulus produces more revenue for the Treasury. The Tories, even at this late date, could begin the public education programme that would make all this politically possible. But I’m not holding my breath.